The Malaysian cases are very clear on the effect of section 75 of the Contracts Act, ie. in every case where a sum is named in a contract as the amount to be paid in case of breach, such sum is to be treated as a penalty. The leading case on section 75 is the Federal Court’s decision in Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy (1995) (‘Murugiah’). In Murugiah, the Federal Court made it clear that:

• section 75 deems a liquidated damages clause to be penal and therefore invalid (except as a ceiling for recovery). Accordingly, any sum expressed as liquidated damages cannot, in and of itself, be automatically recovered by the injured party;

• even if a contract contained a liquidated damages clause, an injured party must still prove his actual loss;

• if owing to ‘a lack of an established measure of damages’, an injured party found it difficult to prove his actual loss, his claim would not fail. Instead, section 75 would permit him to recover ‘reasonable compensation’ (ie, a sum which is ‘reasonable and fair according to the court’s good sense and fair play’) capped at the value of the sum expressed as liquidated damages; and

• the relevant words in section 75 which permit an injured party to obtain recovery - despite being unable to prove his actual loss - are the words, ‘whether or not actual damage or loss is proved to have been caused thereby’.

If everything went as scripted by the Federal Court in Murugiah, contractors would have rejoiced and employers would have endured sleepless nights. For employers, the Murugiah case could not have come at a worse time. With projects becoming increasingly complex - and hence, more susceptible to delay - the inability to rely on a liquidated damages clause and the corresponding requirement of having to prove actual loss was a daunting prospect. They thus began amending their liquidated damages clauses to try to circumvent the Murugiah ruling concerning actual proof. Sensing this discomfort, the lower courts in Malaysia also struggled to find a way around the Murugiah ruling which was binding on them.